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Sunday, 15 March 2009

Fatawa: Asset Securitisation

RESOLUTION

At its seventh meeting on 1 December 1995, the IISG resolved that asset securitisation is permissible if the underlying asset to the instrument is Syariah compliant.


INTRODUCTION

In general, asset securitisation is a process of issuing securities by selling financial assets identified as an underlying asset to a third party. Its purpose is to liquidate financial assets for cash, or as an instrument to obtain new funds at more attractive cost, compared to obtaining funds through direct borrowing from finance institutions.

Specifically, financial assets which have a future cash flow will be sold by a company that needs liquidity or as a new fund to a third party known as a special purpose vehicle (SPV) for cash. To enable the payment for the purchase of the assets, the Spy will issue asset-backed debt securities to investors, based on the future cash flow of the assets. Investors will then gain returns through a future cash flow managed by the SPV.

Among the assets with a future cash flow that has the potential to be securitised for the issuance of asset-backed debt securities issues are house financing receivable account, credit card account, vehicle financing receivable account, highway toll collection etc. In the Islamic context regarding asset securitisation, the assets must be in accordance with the Syariah.


ARGUMENTS THAT SUPPORT THE PERMISSIBILITY OF ASSET SECURITISATION

The basis for the concept of asset securitisation is already present in Islam and has been discussed at length by past Islamic jurists especially, the securitisation of cash flow. The basis can be viewed through the following principles:


The Mal Principle

The use of assets as collateral in asset securitisation, to enable an instrument of value to be issued, is part of the mal principle in Islam. Mal refers to something that has value and can be gainfully used according to Syariah. A clear difference between the concept of mal and an asset lies in the things prohibited by Syariah. In Islam, prohibited items such as liquor and pork are not included in the mal category for Muslims. However, if they are owned by non-Muslims, these items are mal for them.

Cash flow is also included in the category of mal if its origin is halal (lawful) according to Syariah. This is because, cash flow is considered a dayn (debt) and according to Islamic jurisprudence, a debt with no ambiguity is haq maliy which is included in mal.


Bai' Dayn

Asset securitisation is related to the sale of debts, (bai' dayn (which is debated in Islamic jurisprudence. IISG, at its eighth meeting on 25 January 1996, and the SAC at its second meeting on 21 August 1996, discussed this issue. The SAC, at its second meeting, had agreed to accept bai' dayn in the structuring of Islamic Capital Market products.


The Rahn Principle

In asset securitisation, a fixed cash flow is the main criteria of the asset. The cash flow of the asset is packaged and made as an underlying asset for issuing securities. This form of securitisation conforms to the rahn principle in Islamic jurisprudence. Rahn is a valuable underlying asset (collateral) used to obtain funding on credit. A collateral must have the mal feature to enhance the confidence of creditors to provide the funds. The mal can be used as a collateral to redeem a debt in the event there is a failure to settle the debt.


Opinions of Past Islamic Jurists

There is evidence in Islamic jurisprudence that allows the use of cash flow as a collateral to obtain new funding which enables the creditor to achieve liquidity. With this available liquidity the creditor can participate in or seize opportunities of economic activities, without having to wait for a long time to recover the debt. In a statement from the Maliki mazhab, a debt was allowed to be used as collateral for funding. This means that the Maliki mazhab had established a concept that packaged cash flow as an underlying asset for obtaining funds.

The example quoted from the Maliki mazhab was a wage earned by a mudabbar )slave) from jobs done for his master which was used as a collateral to redeem a loan. This meant that throughout his master's life, the mudabbar worked and earned an income for his master. The Maliki mazhab stated that an income that was going to be earned by the mudabbar could be packaged by his master as a collateral of value for getting funding. This proves that a cash flow can be packaged and accepted as a collateral of value. In short, say a mudabbar works to earn a monthly wage of RM1,000. In a year he is able to earn RM12,000. The master can turn the cash flow into a collateral of value for getting funding of e.g. RM6,000 for a period of less than a year.

Cash flows currently in the form of income from toll collection, electricity bills, water bills, telephone bills, Islamic house financing, and Islamic vehicle financing can also be packaged as underlying assets. This is because such cash flows are fixed cash flows for the company.




Wathiqah Dayn

To enable the public be more actively involved in economic activities through investments, assets with regular streams of cash flow can be packaged and used as underlying assets for issuing securities.

The Maliki mazhab put forward this idea in the term wathiqah dayn. A paper of value symbolises the total share of ownership of an ongoing project. It is also known as sukuk (or shahadah). Sukuk only acts as a financial instrument. It is similar to a company share certificate that renders easy transfer of ownership.

Liquidity can be obtained with sukuk, enabling the entrepreneur to inject capital into the economic cycle. The sukuk issued is based on the system of mudharabah, musyarakah mutanaqisah, ijarah etc. It all depends on the form of business activity that is backed and how the profits will be distributed.


Country Of Origin : Malaysia
State : Kuala Lumpur
Fatawa Issuing Body : Securities Commission
Author/Scholar : Syariah Advisory Council
Date Of Issue : October 2003

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Alfalah Consulting - Kuala Lumpur: www.alfalahconsulting.com
Consultant/Speaker/Motivator : www.ahmad-sanusi-husain.com 
Islamic Investment Malaysia: www.islamic-invest-malaysia.com


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